Papandony v Citibank

[2002] NSWSC 388

CITATION:	Papandony and Another v Citibank [2002] NSWSC 388
FILE NUMBER(S):	SC 50148/01
HEARING DATE(S):	18/04/02
JUDGMENT DATE:	14 May 2002
PARTIES :	Steven Papandony - 1st Plaintiff Gannemon Pty Ltd - 2nd Plaintiff Citibank Limited - Defendant
JUDGMENT OF:	Gzell J

COUNSEL :	B R McClintock SC with Kate Trail for the plaintiffs S Epstein SC for the defendant
SOLICITORS:	Deacons Lawyers Christopher Levingston & Associates Solicitors
CATCHWORDS:	CHEQUES- bearer cheques crossed "not negotiable" - drawing procured by fraud - no concluded contracts - drawer remains true owner entitled to immediate possession - third party deposits permitted by bank - conversion - deposit not authorised by senior executive contrary to standard procedure - bank fails to establish it acted without negligence - statutory defence fails - bank allows drawings on customer account before notice of fraud - change of position and acting to detriment relevant to voidable transactions but not to void transactions - formal submission that contributory negligence a defence to conversion.
LEGISLATION CITED:	Cheques Act 1986 (Cth)
CASES CITED:	Penfolds Wines Pty Ltd v Elliott (1946) 47 CLR 204 at 229 Lloyds Bank v The Chartered Bank of India Australia and China [1929] 1 KB 40 Marfani & Co Ltd v Midland Bank Ltd [1968] 1 WLR 956 at 970-971 Bute (Marquess) v Barclays Bank Ld [1955] 1 QB 202 at 211 Hunter BNZ Finance v ANZ Banking Group [1990] VR at 46 North and South Wales Bank v Macbeth [1908] AC 137 Midland Bank Ld v Reckitt [1933] AC 1 Great Western Railway Co v London and County Banking Co Ld [11901] AC 414 Morison v London County and Westminster Bank Ld [1914] 3 KB 356 Lloyds Bank Ld v Chartered Bank of India, Australia and China [1929] 1 KB 40 Australian Guarantee Corporation Ltd v State Bank of Victoria [1989] VR 617 Hunter BNZ Finance v ANZ Banking Group [1990] VR 41 Ludbroke Co v Todd (1914) 30 TLR 433 Cundy v Lindsay (1878) 3 App Cas 459 at 461 Tate v Wilts and Dorset Bank (1899) 1 Legal Decisions Affecting Banker 286 Holland v Russell 4 B & S 14 (122 ER 365) Harrisons Group Holdings Ltd v Westpac Banking Corporation (1989) 51 SASR 36 Hunter BNZ Finance Ltd v C G Maloney Pty Ltd (1988) 18 NSWLR 420 Orix Australia Corporation Ltd v M Wright Hotel Refrigeration Pty Ltd (2000) 155 FLR 267 Associated Midland Corporation Ltd v Bank of New South Wales [1983] 1 NSWLR 533 Associated Midland Corporation Ltd v Bank of New South Wales (1984) 51 ALR 641 State Bank of New South Wales v Midland Credit Ltd, unreported, Court of Appeal, 16 July 1984 Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co Ltd (1914) 19 CLR 457 at 467 Bavins, Junr & Sims v London South Western Bank [1900] 1 QB 270 Australia and New Zealand Banking Group Ltd v Westpac Banking Coproration (1987-1988) 164 CLR 622 David Securities Pty Ltd v Commonwealth Bank of Australia (1991-1992) 175 CLR 353 Nemur Varity Pty Ltd v National Australia Bank Ltd [1999] VSC 342 Wilton v Commonwealth Trading Bank of Australia [1973] 2 NSWLR 644 Day v Bank of New South Wales (1978) 18 SASR 163 Grantham Homes Pty Ltd v Interstate Permanent Building Society Ltd (1979) 37 FLR 191 Australian Guarantee Corporation Ltd v Commissioners of the State Bank of Victoria [1989] VR 617
DECISION:	See par 43

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

GZELL J

TUESDAY 14 MAY 2002

50148/01 STEVEN PAPANDONY and ANOTHER v CITIBANK LIMITED

JUDGMENT

1 When this matter came before me for trial, I gave leave to amend the pleadings and adjourned the hearing for three days. Under the reconstituted pleadings the plaintiffs abandoned a case in negligence and pressed only their claim in conversion.

2 The first plaintiff won Lotto in 1998 and incorporated the second plaintiff. He opened an account with St George bank in the name of the second plaintiff into which the Lotto winnings were deposited. The plaintiffs chose not to tender all the exhibits to the affidavits of the first plaintiff. There are some gaps in the history of the matter. On the material before me, Timothy Brachmanis became a customer of the defendant in June 1988 and opened an account in his own name. Brachmanis was the sole director and secretary of Brac Enterprises Pty Ltd, Brac Property Holdings Pty Ltd and Brac Property Pty Ltd. None of these companies opened accounts with the defendant.

3 Brachmanis claimed that Brac Enterprises Pty Ltd had been granted an exclusive distributorship by Sears International Marketing Inc of Sears power tools and gardening products in Australia and New Zealand to which Sears Roebuck & Co was to contribute an advertising subsidy. Brachmanis told the first plaintiff that he intended to sell the products through a chain of franchised stores. In circumstances set out later in these reasons, Brachmanis induced the first plaintiff to draw and pass to him the following cheques drawn on the second plaintiff’s account and made payable to the entities specified below:

Date of Cheque	Payee	Amount
24.08.98	Brac Enterprises Pty Ltd	$25,000
27.08.98	Sears	$225,000
30.09.98	Brac Property	$212,307
30.09.98	Brac Holdings P/L	$281,485
30.09.98	Sears	$250,000

4 Each of the cheques were deposited to the account of Brachmanis with the defendant, two days after the drawing of the first cheque, the day after the drawing of the second cheque and on the day of drawing the last three cheques. The defendant accepted the cheques as collecting bank. It collected the proceeds from St George Bank and credited the amounts to the account of Brachmanis.

5 At the time the defendant had a procedure with respect to third party cheques, that is, cheques for deposit to a customer’s account which were made payable to some other person. Tellers had no authority to accept such cheques or to deposit them to a customer’s account. The procedure was that the cheque should be referred to a more senior member of staff in the operations management division of the defendant. That officer would require some explanation of the relationship between the third party and the customer. In the case of a corporate payee, the practice was to establish whether the customer was a director of the payee by an instant search of Australian Securities and Investment Commission records.

6 Tracey Goodwin, an employee of the defendant, was the relationship manager for Brachmanis. She gave evidence of the bank’s procedure with respect to third party cheques. She was cross-examined. She said she did not authorise the deposits to the personal account of Brachmanis and there was no apparent authorisation on the photocopies of the cheques in evidence. Some of the deposit slips included a code indicating that the cheques deposited were to be regarded as having cleared funds. Ms Goodwin said that on a number of occasions Brachmanis visited her office asking whether he could immediately draw upon cheques to be deposited. She invariably answered in the negative. On one occasion he said he had a desperate need for money and a pressing need for the funds in question.

7 Scott Muir who was operations manager of the defendant at the relevant branch gave evidence that it was part of his duties to review cheques presented to the defendant for payment which were drawn against customer accounts with insufficient cleared funds. The dealings of Brachmanis with the defendant exemplified this practice. If the cheques of the second plaintiff had not been deposited to his account, Brachmanis would not have been in a position to make the withdrawals which he did. Mr Muir was cross-examined. He did not authorise the deposit of the cheques to the account of Brachmanis. He said that if someone in the operations management division had authorised the deposits there would be a signature on the front or the back of the cheques. He saw only one initial, that of a teller, and nothing to indicate that the cheques had been referred to anyone for authorisation. At one stage the account of Brachmanis was overdrawn to the extent of $228,349.53. Mr Muir said he did not authorise that level of overdrawing. It was beyond his authority but it was clear that somebody had authorised it. There was a diary note on the computer file of Brachmanis: “Chq’s payable to ‘Brac Holdings, Property, Enterprises etc and also ‘Sears’ accepted to this account”. Mr Muir said that some arrangement had been made. There was nothing to indicate the author of the note.

8 The essence of the tort of conversion is a dealing with a chattel in a manner repugnant to the immediate right of possession of another person who has the property or special property in the chattel (Penfolds Wines Pty Ltd v Elliott (1946) 47 CLR 204 at 229 per Dixon J). The tort is applicable to cheques and other negotiable instruments (Lloyds Bank v The Chartered Bank of India Australia and China [1929] 1 KB 40). Critical to the plaintiff’s case is the question whether the second defendant retained the immediate right to possession of the cheques notwithstanding the first plaintiff’s delivery of them to Brachmanis.

9 The risk of a banker committing the tort of conversion was described by Diplock LJ in Marfani & Co Ltd v Midland Bank Ltd [1968] 1 WLR 956 at 970-971:

“At common law, one’s duty to one’s neighbour who is the owner, or entitled to possession, of any goods is to refrain from doing any voluntary act in relation to his goods which is a usurpation of his proprietary or possessory rights in them. Subject to some exceptions which are irrelevant for the purposes of the present case, it matters not that the doer of the act of usurpation did not know, and could by the exercise of any reasonable care have known, of his neighbour’s interest in the goods. The duty is absolute; he acts at his peril.
A banker’s business, of its very nature, exposes him daily to this peril. His contract with his customer requires him to accept possession of cheques delivered to him by his customer, to present them for payment to the banks upon which the cheques are drawn, to receive payment of them, and to credit the amount thereof to his own customer’s account, either upon receipt of the cheques themselves from the customer or upon receipt of actual payment of the cheques from the banks upon which they are drawn. If the customer is not entitled to the cheque which he delivers to his banker for collection, the banker, however innocent and careful he might have been, would at common law be liable to the true owner of the cheque for the amount of which he receives payment, either as damages for conversion or under the cognate cause of action, based historically upon assumpsit, for money had and received.”

10 Conversion lies at the suit of the true owner of the cheque. This is recognised in the Cheques Act 1986 (Cth), s 95 which affords statutory protection to a collecting bank and to which reference will be made later. The term is not defined in the Act. Byles on Bills of Exchange, 26th ed, Sweet and Maxwell, 1988 at 329 states it to mean the person entitled to the property in, and possession of, the bill as against all other claimants. Paget’s Law of Banking, 11th ed, Butterworths, 1996 at 388-389 defines the concept thus:

“The true owner of a cheque must be the party with an unassailable title to it whether in possession of it or not, for the reason that a cheque is a negotiable instrument. That party may not be the holder or last transferee; where forgery enters into the matter the true owner must be someone prior to the forgery, but if it is only a question of defective title, even though the transfer may have been affected by fraud, the transferee or holder may yet be the true owner. At the time the cheque is issued either the drawer or the payee is the true owner, the payee if he has not come by the cheque fraudulently and the drawer if the payee has been fraudulent; but if, before the fraud is known, the cheque is transferred to someone taking as a holder in due course within s 29 of the Bills of Exchange Act 1882 he is the true owner.”

It was upon this discussion in an earlier edition of Paget that Byles relied.

11 In order to claim in conversion, however, it is not necessary for a plaintiff to establish that he or she is the true owner of the cheque. It is sufficient if it can be proved that at the time of the alleged conversion the plaintiff was entitled to immediate possession (Bute (Marquess) v Barclays Bank Ld [1955] 1 QB 202 at 211. See, also, Hunter BNZ Finance v ANZ Banking Group [1990] VR 41 at 46).

12 The plaintiffs claim that the cheques were procured by Brachmanis by fraud, the transactions were void and the second plaintiff remained the true owner or was, at the least, entitled to immediate possession of the cheques which were therefore converted by the defendant upon collecting the proceeds and crediting them to the account of Brachmanis. The defendant does not admit that the cheques were procured by fraud. It argues that the cheques came into the hands of the payees by delivery to their agent Brachmanis and the payees thereby became the true owners of the cheques with whom the bank dealt prior to any avoidance of voidable transactions between the plaintiffs and Brachmanis. The defendant claims that since it had altered its position to its detriment, it was too late for the plaintiffs to avoid the transactions. The defendant also claims the protection of the Cheques Act 1986 (Cth), s 95 and claims that the plaintiffs were guilty of contributory negligence.

13 The plaintiff relies on a series of cases and statements in the texts that if a cheque has been obtained by fraud and there is no one with a better title, the drawer is the true owner. Chalmers & Guest on Bills of Exchange, 14th ed, Sweet & Maxwell, 1991 at 171 say that the drawer of a cheque will be its true owner if he is induced by the fraud of a rogue to draw a cheque payable to a third party which is then misappropriated by the rogue. The authors cite North and South Wales Bank v Macbeth [1908] AC 137 but was a case in which the proposition was conceded rather than decided. In Bute (Marquess) at 211-212, McNair J, however, said that cases such as Midland Bank Ld v Reckitt [1933] AC 1, Great Western Railway Co v London and County Banking Co Ld [1901] AC 414, Morison v London County and Westminster Bank Ld [1914] 3 KB 356 and Lloyds Bank Ld v Chartered Bank of India, Australia and China [1929] 1 KB 40 established the principle that where there was fraud in drawing or in obtaining the drawing of a cheque the drawer remained the true owner. The proposition has been accepted in Australia (W S Weerasooria, Banking Law and the Financial System in Australia, 5th ed, Butterworths, 2000, pars 25.59-25.60, Weaver and Craigie, Banker and Customer, Law Book Company, Vol 2, par 15.240).

14 In Australian Guarantee Corporation Ltd v State Bank of Victoria [1989] VR 617 the plaintiff drew a number of cheques in favour of companies or businesses it believed had delivered goods to entities which were to enter into lease transactions with it. The cheques were handed to a finance broker for the purpose of paying the suppliers to obtain title to the goods. Each cheque was made payable to the payee or bearer and bore a crossing “not negotiable credit bank a/c payee only”. Each cheque came into the hands of the proposed lessee and the defendant bank credited the account of the lessee and collected the proceeds in the ordinary course. Paget at 420 draws a distinction between the handing over of a negotiable instrument under a completed contract and the handing over of a negotiable instrument where no contract exists. In the former case the author argues that even if induced by fraud, property in the negotiable instrument passes under a voidable contract:

“The property and right of possession in and to the chattel are divested but, on repudiation of the contract, revert to the defrauded person, subject to any right acquired by third parties in the interval.”

On the other hand, if there is no contract Paget says that the arrangement is void and property remains in the drawer. In AGC at 634 an argument that the cheques had been handed over under a concluded contract was rejected by Ormiston J:

“The argument that once each group of cheques had been handed over by AGC to the broker, then AGC regarded the transaction as complete, so that it could not contend that no interest in the “leased” goods passed to it, is again not a realistic commercial analysis in the circumstances of these proceedings. Naturally AGC thought that each transaction had been completed in the sense that the lease had come into operation for they had been supplied with invoices and delivery and/or installation receipts, but, from its point of view, no lease could be effectuated unless title to the invoiced items pass to it. That did not depend on the making of the lease agreements, indeed the lease would in ordinary circumstances rely upon the lessor to obtain title. It is unrealistic to say that AGC would have been content as soon as each lease transaction was “completed”, for that takes no account of the need to obtain title to each of the items, which was AGC’s effective protection against the lessee’s default.”

His Honour went on to conclude that in the absence of any real transaction, each of the cheques had been drawn in favour of a person who neither had, nor would in the foreseeable future have, any right to claim payment on or deal with the cheques so that neither the broker nor the purported lessees had any right to deal with the cheques and any dealing with them amounted to a conversion.

15 To similar effect is the decision of Tadgell J in Hunter BNZ Finance v ANZ Banking Group [1990] VR 41. A company proposed to lease computer equipment from the plaintiff. The plaintiff drew a bearer cheque crossed “not negotiable a/c payee only” in favour of the supposed supplier. The cheque was collected by a finance broker and delivered to the proposed lessee which deposited it to its account with the defendant bank which collected the proceeds. At 46 his Honour said:

“Any cheque drawn in favour of a person other than the drawer can be presumed to be intended by the drawer ultimately to go to the payee. Until it does, or until it gets into the hands of someone of whom the drawer cannot complain, the drawer will ordinarily remain entitled to possession of it. Hence, I think it may generally be said that, should a bearer cheque not come into the hands of the payee, the drawer will remain the true owner and will be entitled to immediate possession of it.”

His Honour observed that there was not a great deal of direct and explicit authority for the proposition, possibly because it was so obvious. His Honour referred to Chorley, Law of Banking , 6th ed at 122 where his Lordship asserted the proposition citing Ludbroke Co v Todd (1914) 30 TLR 433 as authority. As Tadgell J points out, however, that case did not decide the point but assumed it. Nevertheless, Tadgell J accepted Lord Chorley’s statement as correct as a matter of principle. His Honour pointed out that it could scarcely be doubted that if, before the cheque had been presented for payment, the plaintiff had learned the true facts it could properly have demanded the return of the cheque and, if necessary, sought to restrain its presentation. And his Honour referred to it Bute ( Marquess) at 211 and to AGC.

16 Mr Epstein SC, who appeared for the defendant, sought to distinguish the instant circumstances on the basis that there was a concluded contract between the plaintiffs and the companies of Brachmanis so that property passed to the payees, the contracts were voidable only and the defendant having acted to its detriment by allowing Brachmanis to draw against the funds, the plaintiffs were not in a position to rescind the contracts. In Cundy v Lindsay (1878) 3 App Cas 459 at 461 Lord Penzance in the course of argument observed:

“Is there no distinction between the case of a man who, being deceived, enters into a contract, and that of a man who, being also deceived, does not enter into a contract?”

The answer was given by the Lord Chancellor, Lord Cairns, at 466:

“The result, therefore, my Lords, is this, that your Lordships have not here to deal with one of those cases in which there is de facto a contract made which may afterwards be impeached and set aside, on the ground of fraud; but you have to deal with a case which ranges itself under a completely different chapter of law, the case namely in which the contract never comes into existence.”

That the distinction applies equally to cheques and other negotiable instruments is suggested by Lord Davies reference to Cundy in Great Western Railway v London and County Banking Co [1901] AC 414 at 420. It was held to apply by a Divisional Court in Tate v Wilts and Dorset Bank (1899) 1 Legal Decisions Affecting Bankers 286. In that case the plaintiff drew a cheque on its bank payable to the order of one Dixon crossed “not negotiable” in part payment for scrap iron to be delivered. Dixon’s real name was Laidman. He took the cheque to the defendant bank which opened an account in the name of Laidman to which the amount of the cheque was credited. The defendant allowed Laidman to draw upon the funds at once. The proceeds were collected in due course. Darling J concluded that there was, de facto , a contract and upon the assumption that the defendant was the agent of Laidman, the rule in Holland v Russell 4 B & S 14 (122 ER 365) applied and the plaintiff could no longer repudiate the contract. In the latter case it was said that A being only an agent, of which B was aware, and having, without notice of B’s intention to repudiate the contract, paid over to his principal the amount received from underwriters, B was not entitled to recover back from A his amount of the insurance.

17 The first plaintiff met Brachmanis on 24 August 1998 when Brachmanis said he had the rights to sell Sears franchises in Australia. He said Sears had incredible buying power and would take on Bunnings, Mitre 10, BBC Hardware and all the other major hardware chains. Brachmanis offered him 49% of the franchise for the Parramatta area with the option to purchase the rest for $250,000. He said that the first plaintiff needed to pay a territory reservation fee at $25,000. He was shown a Disclosure Document which he took away with him to study. The first plaintiff asked to see the contract with Sears for the right to sell the franchise. Brachmanis said he did not have it with him but would show it to him at their next meeting. The first plaintiff wrote the cheque on the second plaintiff’s account for $25,000 in favour of Brac Enterprises Pty Ltd on the faith of these representations.

18 Brachmanis was a fraudster. He had no right to sell Sears franchises in Australia. I find that the drawing of the cheque was procured by the fraud of Brachmanis. I further find that the above transaction did not give rise to a concluded contract. The cheque was not handed over to Brachmanis in completion of their arrangements. It was a down payment. The first plaintiff had not seen the contract granting Brachmanis Enterprises Pty Ltd the franchise, let alone the contract between that company and him or the second plaintiff to acquire the 49% interest in the franchise for the Parramatta area. To use the words of Lord Penzance, this was a case of a man who, being deceived, did not enter into a contract. The submission of the defendant that there was a concluded contract is against the commercial realty of the situation.

19 Similar considerations arise with respect to the other cheques. Three days later the first plaintiff met Brachmanis outside a store at Prospect selling Sears power, hand and garden equipment. The first plaintiff said he had gone over the documents and there did not appear to be any problems. He wrote the cheque on the second plaintiff’s account for $225,000 made out to Sears. Again, the negotiations were not finalised. The first plaintiff had still not seen the agreement granting the franchise to Brac Enterprises Pty Ltd or the agreement by which he or the second plaintiff was to acquire the 49% interest.

20 On 30 September 1998 the first plaintiff met Brachmanis at Riverstone. Brachmanis said he had revised the plans for the purchase of premises at 5/552 Church Street, Parramatta. He said a final offer of $810,000 with a 60-day settlement had been accepted by the vendor. Brachmanis offered the first plaintiff a 25% interest in the property. He produced a document with facts and figure relating to the purchase. The first plaintiff said it looked like a good deal. He was asked to make out the cheque to Brac Property. He wrote the cheque for $212,307 on the second plaintiff’s account. He also signed a second mortgage relating to that property.

21 Brachmanis then said he had recently purchased a property at 6 Joalah Road, Duffys Forest which he was going to develop and sell for a large profit. Brachmanis showed the first plaintiff a feasibility study relating to the premises. He offered the first plaintiff a 20% interest for $281,485. The first plaintiff wrote a cheque on the second plaintiff’s account in that amount made payable to Brac Property Holdings P/L. Brachmanis asked that he amend the cheque and make it payable to Brac Holdings P/L as the property was in that name, which the first plaintiff did. Again the first plaintiff signed a second mortgage over the property.

22 Brachmanis then asked the first plaintiff whether he would like to own the Prospect Sears store as well. He was shown an investor’s disclosure document. He was told it was going to be run along the same lines as the Parramatta store. He was offered a 49% interest. The investor’s disclosure document included a territory reservation agreement signed by Brachmanis which the first plaintiff then signed. He also signed a shareholder’s agreement. He then made out a cheque on the second plaintiff’s account for $250,000 payable to Sears.

23 I find that there was no concluded agreement with respect to the interest in the Church Street property, the Duffys Forest property or the Prospect property. There was no transfer of the part interest in the title to either of the first two properties, nor the acquisition of shares in the company owning the Prospect store. I also find that the drawing of the cheques was procured by the fraud of Brachmanis.

24 The first plaintiff received a phone call from his bank the next day with respect to the payment of the cheques. He said he had term deposits of three and six months which he asked to be closed to pay the cheques.

25 During October 1998 the first plaintiff received a copy of the company register for the Parramatta store annexed to which were minutes of a meeting said to be attended by him, Brachmanis, his brother and another at Brighton Le Sands. The first plaintiff had not attended the meeting. He refused to sign the document. In October 1998 Brachmanis went to the United States, leaving details of two persons who might be contacted in his absence. The first plaintiff found these persons to be evasive. He drove to the Duffys Forest property and noticed “For Sale” signs. He drove to the real estate agent. The real estate agent was surprised that the first plaintiff said he had an interest in the property because the property had not been sold. The first plaintiff drove to the Parramatta property and spoke with the real estate who was frustrated by the long drawn out negotiations between the solicitors after contracts had been finalised. In November 1998 Brachmanis returned from the United States. Numerous calls by the first plaintiff to him and to the two contacts were not returned. In about the middle of November the first plaintiff received a telephone call from Brachmanis who said the stores would open on 11 December 1998. Later, Brachmanis said there was going to be a meeting on 3 December 1998 to finalise the store openings.

26 A 29 page colour-printed booklet with the name of Deloitte Touche Tohmatsu on the front cover, entitled “Sears Australia Brac Enterprises Pty Limited Information Memorandum November 1998” was in evidence. It stated that Sears Roebuck & Co had a long and distinguished history in the retail market in the Untied Stated and its management had been approached by Brachmanis to discuss the possibility of obtaining an exclusive distributorship arrangement within Australia and New Zealand. In response to this, the booklet stated that Sears International Marketing Inc had agreed to issue an exclusive distributorship to Brac Enterprises covering Australia and New Zealand

27 On the 7 December a meeting took place at which Brachmanis said that the Sears stores would open on 24 January 1999. The first plaintiff was shown a document which contained a projection of Sears in Australia and the future of the company. He asked for a copy of the document. He was not provided with it. The first plaintiff became extremely suspicious in December 1998 and contacted solicitors. He asked his bank to trace the cheques and was informed that they have been deposited to the personal account of Brachmanis.

28 In January 1999 the first plaintiff contacted one of the nominated contacts of Brachmanis and asked whether Brachmanis had the right to sell the Prospect franchise. The contact said he did not and gave him a copy of an e-mail to that effect from Sears International Marketing Inc. The contact gave the first plaintiff a copy of the distribution agreement between Brac Enterprises Pty Ltd, described as the “Distributor” and Sears International Marketing Inc of the United States, described as “SIMI”. Clause 7.10 of the agreement was in the following terms:

“Distributor and SIMI are acting as independent parties under this agreement, and Distributor is not an employee or agent of SIMI. Nothing herein is intended to make either party a general or special agent, legal representative, subsidiary, joint venturer, partner, fiduciary, employee or servant of the other party for any purpose. Distributor is not authorised or empowered to act as an agent of SIMI or Sears or to enter into agreements, transact business, or incur obligations for or on behalf of SIMI or Sears, nor to accept legal service of process for or on behalf of SIMI or Sears, nor to bind SIMI or Sears in any manner whatsoever. Distributor shall not do or omit to do anything that might imply or indicate that distributor is an agent or representative of SIMI, Sears, or a branch, division or affiliate of either of them, or that SIMI or Sears is in any way responsible for Distributor’s acts or obligations.”

By clause 1.1 of the agreement, Brac Enterprises Pty Ltd was appointed a distributor of authorised products in Australia.

29 None of the representations made by Brachmanis to the first plaintiff were true. In February 1999, the first plaintiff reported the fraud to the police.

30 The first plaintiff did not authorise Brachmanis to pay any of the cheques into his personal account. Had he known that the cheques were destined to be deposited to the personal account of Brachmanis, he would not have given them to him. The account was closed on 3 August 1999 by which time the funds had been used to meet drawings on the account for the personal benefit of Brachmanis. On 17 August 1999 the defendant was informed of the allegations of fraud by the police.

31 Having concluded that there were no contracts when the first plaintiff handed the cheques to Brachmanis, it does not matter that Brachmanis was the sole director and secretary of the Australian companies or that he was their agent. If by reason of fraud, the intention of the drawer of the cheques is thwarted and the cheques are drawn in favour of unintended recipients, it matters not that the person to whom the cheques are handed would, objectively, be regarded as the agent of the ostensible payees of the cheques. In this case the putative agent is the perpetrator of the fraud.

32 A somewhat similar situation arose in Harrisons Group Holdings Ltd v Westpac Banking Corporation (1989) 51 SASR 36 in which one Dumanovic convinced the plaintiffs to take up a new issue of shares which he said he had already acquired by drawing on a trust account. A cheque drawn on the second plaintiff to “M Dumanovic – Trust Account” and crossed “not negotiable” on behalf of the first plaintiff was handed to Dumanovic. The cheque was paid into an account held by Mr and Mrs Dumanovic with the defendant bank against which cheques were drawn by Dumanovic for his personal use. At 39-40 King CJ concluded that Dumanovic obtained the cheque by false representations with the intention of converting it to his own use. The plaintiffs and, in particular, the second plaintiff never intended to vest any property in Dumanovic but intended the proceeds to be paid through the medium of the supposed trust account to the company allotting the shares. His Honour concluded that Dumanovic had no title to the cheque or its proceeds.

33 My findings also distinguish the case where the fraud involves the participation, innocent or otherwise, of the payee. Hunter BNZ Finance Ltd v C G Maloney Pty Ltd (1988) 18 NSWLR 420 is such case. Maloney fraudulently procured cheques from the plaintiff to finance the acquisition of furniture and fittings for a hotel. It was proposed that the plaintiff would purchase the goods from Indent Imports Pty Ltd (“Indent”) and lease them to Maloney. The plaintiff wrote bearer cheques in favour of Indent crossed “not negotiable a/c payee only”. Maloney, with the assistance of an employee, convinced and executive of Indent to endorse the cheques payable to Maloney or his company. They were deposited to the account of Maloney with the defendant bank. The plaintiff succeeded in conversion but on a different basis. Because the drawer and Maloney intended the cheques to go to Indent and it was a consenting recipient of the cheques, Giles J found that the property passed from the plaintiff as drawer to the payee. (See, also, Orix Australia Corporation Ltd v M Wright Hotel Refrigeration Pty Ltd (2000) 155 FLR 267).

34 Reliance was placed upon Associated MidlandCorporation Ltd v Bank of New South Wales [1983] 1 NSWLR 533 in which the plaintiff drew an order cheque in favour of a supplier crossed “not negotiable bank a/c payee only” for equipment to be leased. When the cheque was handed over, the plaintiff received an invoice issued by the supplier which showed the items in question to have been delivered to the lessee. The cheque was credited to the account of the lessee with the defendant bank. In the court below the plaintiff lost on the basis that property in the cheque passed from the plaintiff to the payee. It was held by a majority of the Court of Appeal that property remained in the drawer. At 535 Hutley JA said that only when the cheque reached the supplier or an agent of the supplier with actual or extensible authority to receive it, would the drawer lose its right to sue. It was submitted that Brachmanis was the agent of the payees of the cheques and delivery to him meant that property had passed from the second plaintiff. The majority of the Court of Appeal treated the arrangements as a concluded contract in which event title will pass to the payee. In that context, the observation of Hutley JA is explicable. In the different context in the instant circumstances of non-concluded transactions, the statement does not compel me to regard delivery of the cheques to Brachmanis as constituting the passing of property in them from second plaintiff. While the majority of the Court of Appeal held that property remained in the drawer, they concluded that the plaintiff was only entitled to nominal damages. In the proceedings in the High Court, Associated Midland Corporation Ltd v Bank of New South Wales (1984) 51 ALR 641, the appellant conceded that it would fail if there had been a contract between it and the supplier. It was held that there was a concluded contract shown either by the invoice as a record of a concluded transaction or by the invoice as an offer which the supplier intended could be accepted by giving the cheque to the person who had possession of the invoice.

35 A different result was reached in State Bank of New South Wales v Midland Credit Ltd, unreported, Court of Appeal, 16 July 1984, in which similar facts arose except that there was evidence that Midland handed the cheque in favour of the supplier to the broker on the specific condition that the broker exchange it with the supplier when the items to be leased were delivered. On that basis the Court of Appeal held that there was no concluded contract. The consequence was that property in the cheque remained with Midland.

36 The Cheques Act 1986 (Cth), s 19(1) provides that a person shall not be taken to be specified in a cheque as payee or indorsee unless the person is named, or otherwise indicated with reasonable certainty, in the cheque and is not a fictitious or non-existing person. Mr Epstein submitted that the two cheques made out to “Sears” fell within this provision and, there being no payee, Brachmanis was the bearer and the true owner of the cheques when handed to him by the first plaintiff. I reject this submission. Sears Roebuck & Co is referred to in the information memorandum. A letter of 2 August 2000 was addressed to the first plaintiff by the managing director of Sears International Marketing Inc and Sears, Roebuck and Co, the letterhead containing in large type single word “SEARS”. The company was also referred to in the distributorship agreement. I find that there was a sufficient identification of Sears, Roebuck and Co to constitute it the payee of the cheques.

37 Mr McClintock SC, senior counsel for the plaintiffs, put an alternative submission based upon Hunter BNZ Finance. Giles J held that the transaction could be rescinded for the fraudulent representations of Maloney and was effectively rescinded by the bringing of the proceedings. Because title to the cheques revested in the plaintiff ab initio upon the rescission, the bank was liable for conversion by relation back. Mr Epstein submitted that the decision was problematical because the supplier was not a party to the proceeding and the notion of rescission seemed inappropriate to a purported sale of non-existent equipment and whether that could be effected by bringing proceedings against parties other than the putative supplier of the non-existent equipment. It was submitted that the case should be treated as though there were no concluded contract or it should be confined to its peculiar facts. In view of my conclusion that the second plaintiff remained the true owner of the cheques, it is unnecessary for me to deal with the plaintiff’s alternative submission and I do not do so.

38 In terms of the Cheques Act 1986 (Cth), s 22, because the cheques in question were not payable to order they were bearer cheques. The cheques were crossed “not negotiable”. Section 55 provides, in those circumstances, that if the cheque is transferred by negotiation, the recipient does not receive and is not capable of giving a better title to the cheque than the title the transferor had. It is not contested that anyone who takes a cheque crossed “not negotiable” does so at risk that the person from whom it is negotiated had no title because, for example, it was stolen (Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co Ltd (1914) 19 CLR 457 at 467). Since Brachmanis had no title to the cheques, the defendant’s payment of the proceeds to his account was conversion and the defendant is liable to the true owner of the cheques, the second plaintiff.

39 The defendant submitted that conversion will not lie against a bank which alters its position to its detriment such as allowing the funds to be drawn against prior to notice of the fraud and reliance was placed upon Bavins, Junr & Sims v London South Western Bank [1900] 1 QB 270. Reliance was also placed upon Tate for the proposition that where a bank which was the holder of cheque collected it in the ordinary course, a fresh disposition of the cheque took place and the former transaction could not thereafter be avoided so as to make the bank liable. These authorities and the unjust enrichment cases of Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1987-1988) 164 CLR 622 and David Securities Pty Ltd v Commonwealth Bank of Australia (1991-1992) 175 CLR 353 were relevant if the transactions were merely voidable. Since I have concluded that the transactions were void, it is unnecessary for me to deal with these submissions on behalf of the defendant. I merely note that in Orix at 275-278 Bleby J analyses the cases on change of position and the requirement of knowledge of more than the fact of receipt, a requirement that the defendant in this case may not have been able to demonstrate.

40 The Cheques Act 1986 (Cth), s 95(1) is in the following terms:

“Where:
(a) a financial institution (the collecting institution ), in good faith and without negligence:
(i) receives payment of a cheque for a customer; or
(ii) receives payment of a cheque and, before or after receiving payment, credits a customer’s account with the sum ordered to be paid by the cheque; and
(b) the customer has no title, or has a defective title, to the cheque;
the collecting institution does not incur any liability to the true owner by reason only of having received payment of the cheque.”

The defendant relies upon this statutory defence. In Hunter BNZ Finance at 441 ff, Giles J analyses the authorities on the fore-runner of the above provision. (See also Nemur Varity Pty Ltd v National Australia Bank Ltd [1999] VSC 342).

41 The defendant did not call evidence as to how the third party cheques came to be deposited to the account of Brachmanis. The evidence before me leads to the inference that the bank’s procedures were not followed and the teller accepted the deposits to the account without seeking approval from a superior. In my view the bank has not established that it acted without negligence and I reject the statutory defence.

42 Contributory negligence was raised in the defence to the further amended summons. Mr McClintock cited the Australian line of authority for the proposition that contributory negligence is not a defence to an action for conversion of a cheque (Wilton v Commonwealth Trading Bank of Australia [1973] 2 NSWLR 644, Day v Bank of New South Wales (1978) 18 SASR 163, Grantham Homes Pty Ltd v Interstate Permanent Building Society Ltd (1979) 37 FLR 191, Australian Guarantee Corporation Ltd v Commissioners of the State Bank of Victoria [1989] VR 617). Mr Epstein put a formal submission to me to preserve his client’s position but did not argue before me that contributory negligence is a defence to an action in conversion.

43 There will be judgment for the plaintiffs for $993,792 plus interest. The defendant should pay the plaintiffs’ costs. I direct the parties to bring in short minutes of orders to that effect.

Last Modified: 05/15/2002